How are reduced interest rate differentials affecting euroization in Southeastern Europe? Evidence from the OeNB Euro Survey

Euroization is a widespread phenomenon in many Central, Eastern and especially Southeastern European countries. From the literature on euroization we derive potential implications of the recently observed reduced interest rate differential between local and foreign currencies for households’ demand for cash holdings, foreign currency deposits and foreign currency loans. We contrast these hypotheses with recent changes in households’ observed saving and borrowing behavior in the region. To this end, we combine information from the OeNB Euro Survey with data from national central banks. The different dynamics of asset and liability euroization observed in the recent period of reduced interest rate differentials in the euroized countries of Southeastern Europe by and large match the theoretical expectations. Based on the literature and the data compiled in this article we conclude that fostering trust in institutions, sustaining macroeconomic stability, providing incentives for saving in the local currency and pursuing a comprehensive policy mix of macro- and micro-prudential measures will help to maintain financial stability and to reduce euroization.